Ais Romney 2006 Slides 10 The Revenue Cycle

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Ais Romney 2006 Slides 10 The Revenue Cycle

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Ais Romney 2006 Slides 10 The Revenue Cycle

  1. 1. HAPTER 10 The Revenue Cycle: Sales and Cash Collections
  2. 2. INTRODUCTION <ul><li>Questions to be addressed in this chapter include: </li></ul><ul><ul><li>What are the basic business activities and data processing operations that are performed in the revenue cycle? </li></ul></ul><ul><ul><li>What decisions need to be made in the revenue cycle, and what information is needed to make these decisions? </li></ul></ul><ul><ul><li>What are the major threats in the revenue cycle and the controls related to those threats? </li></ul></ul>
  3. 3. INTRODUCTION <ul><li>The revenue cycle is a recurring set of business activities and related information processing operations associated with: </li></ul><ul><ul><li>Providing goods and services to customers </li></ul></ul><ul><ul><li>Collecting their cash payments </li></ul></ul><ul><li>The primary external exchange of information is with customers. </li></ul>
  4. 4. INTRODUCTION <ul><li>Information about revenue cycle activities flows to other accounting cycles, e.g.: </li></ul><ul><ul><li>The expenditure and production cycles </li></ul></ul><ul><li>Receive information about sales transactions so they’ll know when to initiate the purchase or production of more inventory. </li></ul>
  5. 5. INTRODUCTION <ul><li>Information about revenue cycle activities flows to other accounting cycles, e.g.: </li></ul><ul><ul><li>The expenditure and production cycles </li></ul></ul><ul><ul><li>The human resources/payroll cycle </li></ul></ul><ul><li>Uses information about sales to calculate commissions and bonuses. </li></ul>
  6. 6. INTRODUCTION <ul><li>Information about revenue cycle activities flows to other accounting cycles, e.g.: </li></ul><ul><ul><li>The expenditure and production cycles </li></ul></ul><ul><ul><li>The human resources/payroll cycle </li></ul></ul><ul><ul><li>The general ledger and reporting function </li></ul></ul><ul><li>Uses information produced by the revenue cycle in preparing financial statements and performance reports. </li></ul>
  7. 7. INTRODUCTION <ul><li>The primary objective of the revenue cycle: </li></ul><ul><ul><li>Provide the right product in the right place at the right time for the right price. </li></ul></ul>
  8. 8. INTRODUCTION <ul><li>Decisions that must be made: </li></ul><ul><ul><li>Should we customize products? </li></ul></ul><ul><ul><li>How much inventory should we carry and where? </li></ul></ul><ul><ul><li>How should we deliver our product? </li></ul></ul><ul><ul><li>How should we price our product? </li></ul></ul><ul><ul><li>Should we give customers credit? If so, how much and on what terms? </li></ul></ul><ul><ul><li>How can we process payments to maximize cash flow? </li></ul></ul>
  9. 9. INTRODUCTION <ul><li>Management also has to evaluate the efficiency and effectiveness of revenue cycle processes: </li></ul><ul><ul><li>Requires data about: </li></ul></ul><ul><ul><ul><li>Events that occur </li></ul></ul></ul><ul><ul><ul><li>Resources used </li></ul></ul></ul><ul><ul><ul><li>Agents who participate </li></ul></ul></ul><ul><ul><li>The data needs to be accurate, reliable, and timely. </li></ul></ul>
  10. 10. INTRODUCTION <ul><li>In this chapter, we’ll look at: </li></ul><ul><ul><li>How the three basic AIS functions are carried out in the revenue cycle, i.e.: </li></ul></ul><ul><ul><ul><li>Capturing and processing data </li></ul></ul></ul><ul><ul><ul><li>Storing and organizing the data for decisions </li></ul></ul></ul><ul><ul><ul><li>Providing controls to safeguard resources (including data) </li></ul></ul></ul>
  11. 11. REVENUE CYCLE BUSINESS ACTIVITIES <ul><li>Four basic business activities are performed in the revenue cycle: </li></ul><ul><ul><li>Sales order entry </li></ul></ul><ul><ul><li>Shipping </li></ul></ul><ul><ul><li>Billing </li></ul></ul><ul><ul><li>Cash collection </li></ul></ul>
  12. 12. REVENUE CYCLE BUSINESS ACTIVITIES <ul><li>Four basic business activities are performed in the revenue cycle: </li></ul><ul><ul><li>Sales order entry </li></ul></ul><ul><ul><li>Shipping </li></ul></ul><ul><ul><li>Billing </li></ul></ul><ul><ul><li>Cash collection </li></ul></ul>
  13. 13. SALES ORDER ENTRY <ul><li>Sales order entry is performed by the sales order department. </li></ul><ul><li>The sales order department typically reports to the VP of Marketing. </li></ul><ul><li>Steps in the sales order entry process include: </li></ul><ul><ul><li>Take the customer’s order </li></ul></ul><ul><ul><li>Check the customer’s credit </li></ul></ul><ul><ul><li>Check inventory availability </li></ul></ul><ul><ul><li>Respond to customer inquiries (may be done by customer service or sales order entry) </li></ul></ul>
  14. 14. 1.1 Take Order Shipping 1.2 Approve Credit 1.3 Check Inv. Avail. Billing Ware- house Purchas- ing 1.4 Resp. to Cust. Inq. Customer Orders Rejected Orders Acknowledgment Orders Approved Orders Back Orders Picking List Sales Order Sales Order Inquiries Response DFD for Sales Order Entry Customer Sales Order Customer Inventory
  15. 15. 1.1 Take Order Shipping 1.2 Approve Credit 1.3 Check Inv. Avail. Billing Ware- house Purchas- ing 1.4 Resp. to Cust. Inq. Customer Orders Rejected Orders Acknowledgment Orders Approved Orders Back Orders Picking List Sales Order Sales Order Inquiries Response DFD for Sales Order Entry Customer Sales Order Customer Inventory
  16. 16. 1.1 Take Order Shipping 1.2 Approve Credit 1.3 Check Inv. Avail. Billing Ware- house Purchas- ing 1.4 Resp. to Cust. Inq. Customer Orders Rejected Orders Acknowledgment Orders Approved Orders Back Orders Picking List Sales Order Sales Order Inquiries Response DFD for Sales Order Entry Customer Sales Order Customer Inventory
  17. 17. 1.1 Take Order Shipping 1.2 Approve Credit 1.3 Check Inv. Avail. Billing Ware- house Purchas- ing 1.4 Resp. to Cust. Inq. Customer Orders Rejected Orders Acknowledgment Orders Approved Orders Back Orders Picking List Sales Order Sales Order Inquiries Response DFD for Sales Order Entry Customer Sales Order Customer Inventory
  18. 18. SALES ORDER ENTRY <ul><li>Sales order entry is performed by the sales order department. </li></ul><ul><li>The sales order department typically reports to the VP of Marketing. </li></ul><ul><li>Steps in the process include: </li></ul><ul><ul><li>Take the customer’s order </li></ul></ul><ul><ul><li>Check the customer’s credit </li></ul></ul><ul><ul><li>Check inventory availability </li></ul></ul><ul><ul><li>Respond to customer inquiries (may be done by customer service or sales order entry) </li></ul></ul>
  19. 19. SALES ORDER ENTRY <ul><li>Take customer orders </li></ul><ul><ul><li>Order data are received on a sales order document which may be completed and received: </li></ul></ul><ul><ul><ul><li>In the store </li></ul></ul></ul><ul><ul><ul><li>By mail </li></ul></ul></ul><ul><ul><ul><li>By phone </li></ul></ul></ul><ul><ul><ul><li>On a website </li></ul></ul></ul><ul><ul><ul><li>By a salesperson in the field </li></ul></ul></ul>
  20. 20. SALES ORDER ENTRY <ul><li>The sales order (paper or electronic) indicates: </li></ul><ul><ul><li>Item numbers ordered </li></ul></ul><ul><ul><li>Quantities </li></ul></ul><ul><ul><li>Prices </li></ul></ul><ul><ul><li>Salesperson </li></ul></ul>
  21. 21. SALES ORDER ENTRY <ul><li>To reduce human error, customers should enter data themselves as much as possible: </li></ul><ul><ul><li>On websites </li></ul></ul><ul><ul><li>On OCR forms </li></ul></ul><ul><ul><li>Via phone menus </li></ul></ul>
  22. 22. SALES ORDER ENTRY <ul><li>How IT can improve efficiency and effectiveness: </li></ul><ul><ul><li>Orders entered online can be routed directly to the warehouse for picking and shipping. </li></ul></ul><ul><ul><li>Sales history can be used to customize solicitations. </li></ul></ul><ul><ul><li>Choiceboards can be used to customize orders. </li></ul></ul><ul><li>Initially popular with Dell and Gateway. </li></ul><ul><li>Now used for purchases of shoes and jeans! </li></ul>
  23. 23. SALES ORDER ENTRY <ul><ul><li>Electronic data interchange (EDI) can be used to link a company directly with its customers to receive orders or even manage the customer’s inventory. </li></ul></ul><ul><ul><li>Email and instant messaging are used to notify sales staff of price changes and promotions. </li></ul></ul><ul><ul><li>Laptops and handheld devices can equip sales staff with presentations, prices, marketing and technical data, etc. </li></ul></ul>
  24. 24. SALES ORDER ENTRY <ul><li>Recall that one objective of the AIS is to ensure the accuracy and reliability of the data collected. With respect to sales order data, the following edit checks should be performed: </li></ul><ul><ul><li>Validity checks on the customer account and inventory item numbers. </li></ul></ul><ul><ul><li>Completeness test to make sure all needed information was collected. </li></ul></ul><ul><ul><li>Reasonableness tests comparing the quantity ordered to past history. </li></ul></ul>
  25. 25. 1.1 Take Order Shipping 1.2 Approve Credit 1.3 Check Inv. Avail. Billing Ware- house Purchas- ing 1.4 Resp. to Cust. Inq. Customer Orders Rejected Orders Acknowledgment Orders Approved Orders Back Orders Picking List Sales Order Sales Order Inquiries Response Customer Sales Order Customer Inventory
  26. 26. 1.1 Take Order Shipping 1.2 Approve Credit 1.3 Check Inv. Avail. Billing Ware- house Purchas- ing 1.4 Resp. to Cust. Inq. Customer Orders Rejected Orders Acknowledgment Orders Approved Orders Back Orders Picking List Sales Order Sales Order Inquiries Response Customer Sales Order Customer Inventory
  27. 27. SALES ORDER ENTRY <ul><li>Sales order entry is performed by the sales order department. </li></ul><ul><li>The sales order department typically reports to the VP of Marketing. </li></ul><ul><li>Steps in the process include: </li></ul><ul><ul><li>Take the customer’s order </li></ul></ul><ul><ul><li>Check the customer’s credit </li></ul></ul><ul><ul><li>Check inventory availability </li></ul></ul><ul><ul><li>Respond to customer inquiries (may be done by customer service or sales order entry) </li></ul></ul>
  28. 28. SALES ORDER ENTRY <ul><li>Credit sales should be approved before the order is processed any further. </li></ul><ul><li>There are two types of credit authorization: </li></ul><ul><ul><li>General authorization </li></ul></ul><ul><li>For existing customers below their credit limit who don’t have past-due balances. </li></ul><ul><li>Credit limits vary by customer based on past history and ability to pay. </li></ul><ul><li>General authorization involves checking the customer master file to verify the account and status. </li></ul>
  29. 29. SALES ORDER ENTRY <ul><li>Credit sales should be approved before the order is processed any further. </li></ul><ul><li>There are two types of credit authorization: </li></ul><ul><ul><li>General authorization </li></ul></ul><ul><ul><li>Specific authorization </li></ul></ul><ul><li>For customers who are: </li></ul><ul><ul><li>New </li></ul></ul><ul><ul><li>Have past-due balances </li></ul></ul><ul><ul><li>Are placing orders that would exceed their credit limit </li></ul></ul><ul><li>Specific authorization is done by the credit manager, who reports to the treasurer. </li></ul>
  30. 30. SALES ORDER ENTRY <ul><li>How can IT improve the process? </li></ul><ul><ul><li>Automatic checking of credit limits and balances </li></ul></ul><ul><ul><li>Emails or IMs to the credit manager for accounts needing specific authorization </li></ul></ul>
  31. 31. 1.1 Take Order Shipping 1.2 Approve Credit 1.3 Check Inv. Avail. Billing Ware- house Purchas- ing 1.4 Resp. to Cust. Inq. Customer Orders Rejected Orders Acknowledgment Orders Approved Orders Back Orders Picking List Sales Order Sales Order Inquiries Response Customer Sales Order Customer Inventory
  32. 32. 1.1 Take Order Shipping 1.2 Approve Credit 1.3 Check Inv. Avail. Billing Ware- house Purchas- ing 1.4 Resp. to Cust. Inq. Customer Orders Rejected Orders Acknowledgment Orders Approved Orders Back Orders Picking List Sales Order Sales Order Inquiries Response Customer Sales Order Customer Inventory
  33. 33. SALES ORDER ENTRY <ul><li>Sales order entry is performed by the sales order department. </li></ul><ul><li>The sales order department typically reports to the VP of Marketing. </li></ul><ul><li>Steps in the process include: </li></ul><ul><ul><li>Take the customer’s order </li></ul></ul><ul><ul><li>Check the customer’s credit </li></ul></ul><ul><ul><li>Check inventory availability </li></ul></ul><ul><ul><li>Respond to customer inquiries (may be done by customer service or sales order entry) </li></ul></ul>
  34. 34. SALES ORDER ENTRY <ul><li>When the order has been received and the customer’s credit approved, the next step is to ensure there is sufficient inventory to fill the order and advise the customer of the delivery date. </li></ul><ul><li>The sales order clerk can usually reference a screen displaying: </li></ul><ul><ul><li>Quantity on hand </li></ul></ul><ul><ul><li>Quantity already committed to others </li></ul></ul><ul><ul><li>Quantity on order </li></ul></ul>
  35. 35. SALES ORDER ENTRY <ul><li>If there are enough units to fill the order: </li></ul><ul><ul><li>Complete the sales order </li></ul></ul><ul><ul><li>Update the quantity available field in the inventory file </li></ul></ul><ul><ul><li>Notify the following departments of the sale: </li></ul></ul><ul><ul><ul><li>Shipping </li></ul></ul></ul><ul><ul><ul><li>Inventory </li></ul></ul></ul><ul><ul><ul><li>Billing </li></ul></ul></ul><ul><ul><li>Send an acknowledgment to the customer </li></ul></ul>
  36. 36. SALES ORDER ENTRY <ul><li>If there’s not enough to fill the order, initiate a back order. </li></ul><ul><ul><li>For manufacturing companies, notify the production department that more should be manufactured. </li></ul></ul><ul><ul><li>For retail companies, notify purchasing that more should be purchased. </li></ul></ul>
  37. 37. SALES ORDER ENTRY <ul><li>Accurate inventory records are needed so customers can be accurately advised of their order status. </li></ul><ul><ul><li>Requires careful data entry in the sales and shipping processes. </li></ul></ul><ul><ul><li>Can be problematic in retail establishments: </li></ul></ul><ul><ul><ul><li>Clerks running a similar item over the scanner several times instead of running each item </li></ul></ul></ul><ul><ul><ul><li>Mishandling of sales returns such that returned merchandise isn’t re-entered in inventory records </li></ul></ul></ul>
  38. 38. 1.1 Take Order Shipping 1.2 Approve Credit 1.3 Check Inv. Avail. Billing Ware- house Purchas- ing 1.4 Resp. to Cust. Inq. Customer Orders Rejected Orders Acknowledgment Orders Approved Orders Back Orders Picking List Sales Order Sales Order Inquiries Response Customer Sales Order Customer Inventory
  39. 39. 1.1 Take Order Shipping 1.2 Approve Credit 1.3 Check Inv. Avail. Billing Ware- house Purchas- ing 1.4 Resp. to Cust. Inq. Customer Orders Rejected Orders Acknowledgment Orders Approved Orders Back Orders Picking List Sales Order Sales Order Inquiries Response Customer Sales Order Customer Inventory
  40. 40. SALES ORDER ENTRY <ul><li>Sales order entry is performed by the sales order department. </li></ul><ul><li>The sales order department typically reports to the VP of Marketing. </li></ul><ul><li>Steps in the process include: </li></ul><ul><ul><li>Take the customer’s order </li></ul></ul><ul><ul><li>Check the customer’s credit </li></ul></ul><ul><ul><li>Check inventory availability </li></ul></ul><ul><ul><li>Respond to customer inquiries (may be done by customer service or sales order entry) </li></ul></ul>
  41. 41. SALES ORDER ENTRY <ul><li>Another step in the sales order entry process is responding to customer inquiries: </li></ul><ul><ul><li>May occur before or after the order is placed </li></ul></ul><ul><ul><li>The quality of this customer service can be critical to company success </li></ul></ul>
  42. 42. SALES ORDER ENTRY <ul><li>Many companies use Customer Relationship Management (CRM) systems to support this process: </li></ul><ul><ul><li>Organizes customer data to facilitate efficient and personalized service </li></ul></ul><ul><ul><li>Provides data about customer needs and business practices so they can be contacted proactively about the need to reorder </li></ul></ul>
  43. 43. SALES ORDER ENTRY <ul><li>The goal of CRM is to retain customers: </li></ul><ul><ul><li>Rule of thumb: It takes 5 times as much effort to attract a new customer as it does to retain an existing one. </li></ul></ul><ul><ul><li>CRMs should be seen as tools to improve the level of customer service and encourage loyalty—not as a way to keep them off your back. </li></ul></ul>
  44. 44. SALES ORDER ENTRY <ul><li>Transaction processing technology can be used to improve customer relationships: </li></ul><ul><ul><li>POS systems can link to the customer master file to: </li></ul></ul><ul><ul><ul><li>Automatically update accounts receivable. </li></ul></ul></ul><ul><ul><ul><li>Print customized coupons (e.g., if the customer just bought yogurt, print a yogurt coupon to encourage repeat sales). </li></ul></ul></ul>
  45. 45. SALES ORDER ENTRY <ul><li>IT should be used to automate responses to routine customer requests. </li></ul><ul><li>Examples: </li></ul><ul><ul><li>Providing telephone menus or websites that lead customers to answers about </li></ul></ul><ul><ul><ul><li>Account balances </li></ul></ul></ul><ul><ul><ul><li>Order status </li></ul></ul></ul><ul><ul><ul><li>Frequently asked questions (FAQs) </li></ul></ul></ul><ul><ul><li>Online chat or instant messaging </li></ul></ul><ul><li>These methods free up customer service reps to deal with less routine issues. </li></ul><ul><li>EXAMPLE: Timex includes their watch manuals online, so a customer who’s missing his manual can find out how to reset his watch when Daylight Savings Time rolls around. No human intervention required. </li></ul>
  46. 46. SALES ORDER ENTRY <ul><li>The effectiveness of a website depends on its design: </li></ul><ul><ul><li>Review records of customer interactions to identify potential problems. </li></ul></ul><ul><ul><li>A poorly-designed, difficult-to-use website can create customer ill will. </li></ul></ul><ul><ul><li>A well-designed site can provide insights that lead to increased sales, e.g., by analyzing website traffic to determine products of greatest interest. </li></ul></ul>
  47. 47. SALES ORDER ENTRY <ul><li>Sales order entry involved the steps of: </li></ul><ul><ul><li>Taking the customer’s order </li></ul></ul><ul><ul><li>Checking the customer’s credit </li></ul></ul><ul><ul><li>Checking inventory availability </li></ul></ul><ul><ul><li>Responding to customer inquiries </li></ul></ul><ul><li>We have now completed sales order entry and are ready to move to the next step. </li></ul>
  48. 48. REVENUE CYCLE BUSINESS ACTIVITIES <ul><li>Four basic business activities are performed in the revenue cycle: </li></ul><ul><ul><li>Sales order entry </li></ul></ul><ul><ul><li>Shipping </li></ul></ul><ul><ul><li>Billing </li></ul></ul><ul><ul><li>Cash collection </li></ul></ul>
  49. 49. SHIPPING <ul><li>The second basic activity in the revenue cycle is filling customer orders and shipping the desired merchandise. </li></ul><ul><li>The process consists of two steps </li></ul><ul><ul><li>Picking and packing the order </li></ul></ul><ul><ul><li>Shipping the order </li></ul></ul><ul><li>The warehouse department typically picks the order </li></ul><ul><li>The shipping departments packs and ships the order </li></ul><ul><li>Both functions include custody of inventory and ultimately report to the VP of Manufacturing. </li></ul>
  50. 50. 2.1 Pick & Pack 2.2 Ship Goods Sales Order Entry Shipping Carrier Billing & Accts. Rec. Picking List Goods & Packing List Goods, Packing Slip, & Bill of Lading Bill of Lading & Packing Slip Sales Order Sales Order Inventory Shipments
  51. 51. 2.1 Pick & Pack 2.2 Ship Goods Sales Order Entry Shipping Carrier Billing & Accts. Rec. Picking List Goods & Packing List Goods, Packing Slip, & Bill of Lading Bill of Lading & Packing Slip Sales Order Sales Order Inventory Shipments
  52. 52. SHIPPING <ul><li>The second basic activity in the revenue cycle is filling customer orders and shipping the desired merchandise. </li></ul><ul><li>The process consists of two steps </li></ul><ul><ul><li>Picking and packing the order </li></ul></ul><ul><ul><li>Shipping the order </li></ul></ul><ul><li>The warehouse department typically picks the order </li></ul><ul><li>The shipping departments packs and ships the order </li></ul><ul><li>Both functions include custody of inventory and ultimately report to the VP of Manufacturing. </li></ul>
  53. 53. SHIPPING <ul><li>A picking ticket is printed by sales order entry and triggers the pick-and-pack process </li></ul><ul><li>The picking ticket identifies: </li></ul><ul><ul><li>Which products to pick </li></ul></ul><ul><ul><li>What quantity </li></ul></ul><ul><li>Warehouse workers record the quantities picked on the picking ticket, which may be a paper or electronic document. </li></ul><ul><li>The picked inventory is then transferred to the shipping department. </li></ul>
  54. 54. SHIPPING <ul><li>Technology can speed the movement of inventory and improve the accuracy of perpetual inventory records: </li></ul><ul><ul><li>Bar code scanners </li></ul></ul><ul><ul><li>Conveyer belts </li></ul></ul><ul><ul><li>Wireless technology so workers can receive instructions without returning to dispatch </li></ul></ul><ul><ul><li>Radio frequency identification (RFID) tags: </li></ul></ul><ul><ul><ul><li>Eliminate the need to align goods with scanner </li></ul></ul></ul><ul><ul><ul><li>Allow inventory to be tracked as it moves through warehouse </li></ul></ul></ul><ul><ul><ul><li>Can store up to 128 bytes of data </li></ul></ul></ul>
  55. 55. 2.1 Pick & Pack 2.2 Ship Goods Sales Order Entry Carrier Billing & Accts. Rec. Picking List Goods & Packing List Goods, Packing Slip, & Bill of Lading Bill of Lading & Packing Slip Sales Order Sales Order Inventory Shipments
  56. 56. 2.1 Pick & Pack 2.2 Ship Goods Sales Order Entry Carrier Billing & Accts. Rec. Picking List Goods & Packing List Goods, Packing Slip, & Bill of Lading Bill of Lading & Packing Slip Sales Order Sales Order Inventory Shipments
  57. 57. SHIPPING <ul><li>The second basic activity in the revenue cycle is filling customer orders and shipping the desired merchandise. </li></ul><ul><li>The process consists of two steps </li></ul><ul><ul><li>Picking and packing the order </li></ul></ul><ul><ul><li>Shipping the order </li></ul></ul><ul><li>The warehouse department typically picks the order </li></ul><ul><li>The shipping departments packs and ships the order </li></ul><ul><li>Both functions include custody of inventory and ultimately report to the VP of Manufacturing. </li></ul>
  58. 58. SHIPPING <ul><li>The shipping department compares the following quantities: </li></ul><ul><ul><li>Physical count of inventory </li></ul></ul><ul><ul><li>Quantities indicated on picking ticket </li></ul></ul><ul><ul><li>Quantities on sales order </li></ul></ul><ul><li>Discrepancies can arise if: </li></ul><ul><ul><li>Items weren’t stored in the location indicated </li></ul></ul><ul><ul><li>Perpetual inventory records were inaccurate </li></ul></ul><ul><li>If there are discrepancies, a back order is initiated. </li></ul>
  59. 59. SHIPPING <ul><li>The clerk then records online: </li></ul><ul><ul><li>The sales order number </li></ul></ul><ul><ul><li>The item numbers ordered </li></ul></ul><ul><ul><li>The quantities shipped </li></ul></ul><ul><li>This process: </li></ul><ul><ul><li>Updates the quantity-on-hand field in the inventory master file </li></ul></ul><ul><ul><li>Produces a packing slip </li></ul></ul><ul><li>The packing slip lists the quantity and description of each item in the shipment. </li></ul>
  60. 60. SHIPPING <ul><li>The clerk then records online: </li></ul><ul><ul><li>The sales order number </li></ul></ul><ul><ul><li>The item numbers ordered </li></ul></ul><ul><ul><li>The quantities shipped </li></ul></ul><ul><li>This produces </li></ul><ul><ul><li>Updates the quantity-on-hand field in the inventory master file </li></ul></ul><ul><ul><li>Produces a packing slip </li></ul></ul><ul><ul><li>Produces multiple copies of the bill of lading </li></ul></ul><ul><li>The bill of lading is a legal contract that defines responsibility for goods in transit </li></ul><ul><li>It identifies: </li></ul><ul><ul><li>The carrier </li></ul></ul><ul><ul><li>The source </li></ul></ul><ul><ul><li>The destination </li></ul></ul><ul><ul><li>Special shipping instructions </li></ul></ul><ul><ul><li>Who pays for the shipping </li></ul></ul>
  61. 61. SHIPPING <ul><li>The shipment is accompanied by: </li></ul><ul><ul><li>The packing slip </li></ul></ul><ul><ul><li>A copy of the bill of lading </li></ul></ul><ul><ul><li>The freight bill </li></ul></ul><ul><ul><ul><li>(Sometimes bill of lading doubles as freight bill) </li></ul></ul></ul><ul><li>What happens to other copies of the bill of lading? </li></ul><ul><ul><li>One is kept in shipping to track and confirm delivery </li></ul></ul><ul><ul><li>One is sent to billing to trigger an invoice </li></ul></ul><ul><ul><li>One is retained by the freight carrier </li></ul></ul>
  62. 62. SHIPPING <ul><li>A major shipping decision is the choice of delivery methods: </li></ul><ul><ul><li>Some companies maintain a fleet of trucks </li></ul></ul><ul><ul><li>Companies increasingly outsource to commercial carriers </li></ul></ul><ul><ul><ul><li>Reduces costs </li></ul></ul></ul><ul><ul><ul><li>Allows company to focus on core business </li></ul></ul></ul><ul><ul><li>Selecting best carrier means collecting and monitoring carrier performance data for: </li></ul></ul><ul><ul><ul><li>On-time delivery </li></ul></ul></ul><ul><ul><ul><li>Condition of merchandise delivered </li></ul></ul></ul>
  63. 63. SHIPPING <ul><li>Another decision relates to the location of distribution centers </li></ul><ul><ul><li>Many customers want suppliers to deliver products only when needed </li></ul></ul><ul><ul><li>Logistical software tools can help identify optimal locations to: </li></ul></ul><ul><ul><ul><li>Minimize amount of inventory carried </li></ul></ul></ul><ul><ul><ul><li>Meet customers’ needs </li></ul></ul></ul><ul><ul><ul><li>Also helps optimize the use of delivery vehicles on a day-to-day basis </li></ul></ul></ul>
  64. 64. SHIPPING <ul><li>Globalization makes outbound logistics more complex: </li></ul><ul><ul><li>Distribution methods differ around the world in terms of efficiency and effectiveness. </li></ul></ul><ul><ul><li>Country-specific taxes and regulations affect distribution choices. </li></ul></ul><ul><ul><li>Logistical software can also help with these issues. </li></ul></ul><ul><li>Advanced communications systems can provide real-time info on shipping status and thus add value: </li></ul><ul><ul><li>If you know a shipment will be late and notify the customer, it helps the customer adapt. </li></ul></ul>
  65. 65. REVENUE CYCLE BUSINESS ACTIVITIES <ul><li>Four basic business activities are performed in the revenue cycle: </li></ul><ul><ul><li>Sales order entry </li></ul></ul><ul><ul><li>Shipping </li></ul></ul><ul><ul><li>Billing </li></ul></ul><ul><ul><li>Cash collection </li></ul></ul>
  66. 66. BILLING <ul><li>The third revenue cycle activity is billing customers. </li></ul><ul><li>This activity involves two tasks: </li></ul><ul><ul><li>Invoicing </li></ul></ul><ul><ul><li>Updating accounts receivable </li></ul></ul>
  67. 67. 3.1 Billing 3.2 Maintain Accts. Rec. Sales Order Entry Billing and Accounts Receivable Customer General Ledger & Rept. Sys. Shipping Mailroom Sales Order Sales Packing Slip & Bill of Lading Invoice Monthly Statements Remittance List Customer Sales
  68. 68. 3.1 Billing 3.2 Maintain Accts. Rec. Sales Order Entry Billing and Accounts Receivable Customer General Ledger & Rept. Sys. Shipping Mailroom Sales Order Sales Packing Slip & Bill of Lading Invoice Monthly Statements Remittance List Customer Sales
  69. 69. BILLING <ul><li>The third revenue cycle activity is billing customers. </li></ul><ul><li>This activity involves two tasks: </li></ul><ul><ul><li>Invoicing </li></ul></ul><ul><ul><li>Updating accounts receivable </li></ul></ul>
  70. 70. BILLING <ul><li>Accurate and timely billing is crucial. </li></ul><ul><li>Billing is an information processing activity that repackages and summarizes information from the sales order entry and shipping activities </li></ul><ul><li>Requires information from: </li></ul><ul><ul><li>Shipping Department on items and quantities shipped </li></ul></ul><ul><ul><li>Sales on prices and other sales terms </li></ul></ul>
  71. 71. BILLING <ul><li>The basic document created is the sales invoice. The invoice notifies the customer of: </li></ul><ul><ul><li>The amount to be paid </li></ul></ul><ul><ul><li>Where to send payment </li></ul></ul><ul><li>Invoices may be sent/received: </li></ul><ul><ul><li>In paper form </li></ul></ul><ul><ul><li>By EDI </li></ul></ul><ul><ul><ul><li>Common for larger companies </li></ul></ul></ul><ul><ul><ul><li>Faster and cheaper than snail mail </li></ul></ul></ul>
  72. 72. BILLING <ul><li>When buyer and seller have accurate online systems: </li></ul><ul><ul><li>Invoicing process may be skipped </li></ul></ul><ul><ul><ul><li>Seller sends an email when goods are shipped </li></ul></ul></ul><ul><ul><ul><li>Buyer sends acknowledgment when goods are received </li></ul></ul></ul><ul><ul><ul><li>Buyer automatically remits payments within a specified number of days after receiving the goods </li></ul></ul></ul><ul><ul><li>Can produce substantial cost savings </li></ul></ul>
  73. 73. BILLING <ul><li>An integrated AIS may also merge the billing process with sales and marketing by using data about a customer’s past purchases to send information about related products and services with his monthly statement. </li></ul>
  74. 74. 3.1 Billing 3.2 Maintain Accts. Rec. Sales Order Entry Customer General Ledger & Rept. Sys. Shipping Mailroom Sales Order Sales Packing Slip & Bill of Lading Invoice Monthly Statements Remittance List Customer Sales
  75. 75. 3.1 Billing 3.2 Maintain Accts. Rec. Sales Order Entry Customer General Ledger & Rept. Sys. Shipping Mailroom Sales Order Sales Packing Slip & Bill of Lading Invoice Monthly Statements Remittance List Customer Sales
  76. 76. BILLING <ul><li>The third revenue cycle activity is billing customers. </li></ul><ul><li>This activity involves two tasks: </li></ul><ul><ul><li>Invoicing </li></ul></ul><ul><ul><li>Updating accounts receivable </li></ul></ul>
  77. 77. BILLING <ul><li>The accounts receivable function reports to the controller </li></ul><ul><li>This function performs two basic tasks </li></ul><ul><ul><li>Debits customer accounts for the amount the customer is invoiced </li></ul></ul><ul><ul><li>Credits customer accounts for the amount of customer payments </li></ul></ul><ul><li>Two basic ways to maintain accounts receivable: </li></ul><ul><ul><li>Open-invoice method </li></ul></ul><ul><ul><li>Balance forward method </li></ul></ul>
  78. 78. BILLING <ul><li>OPEN-INVOICE METHOD: </li></ul><ul><ul><li>Customers pay according to each invoice </li></ul></ul><ul><ul><li>Two copies of the invoice are typically sent to the customer </li></ul></ul><ul><ul><ul><li>Customer is asked to return one copy with payment </li></ul></ul></ul><ul><ul><ul><li>This copy is a turnaround document called a remittance advice </li></ul></ul></ul><ul><ul><li>Advantages of open-invoice method </li></ul></ul><ul><ul><ul><li>Conducive to offering early-payment discounts </li></ul></ul></ul><ul><ul><ul><li>Results in more uniform flow of cash collections </li></ul></ul></ul><ul><ul><li>Disadvantages of open-invoice method </li></ul></ul><ul><ul><ul><li>More complex to maintain </li></ul></ul></ul>
  79. 79. BILLING <ul><li>BALANCE FORWARD METHOD: </li></ul><ul><ul><li>Customers pay according to amount on their monthly statement, rather than by invoice </li></ul></ul><ul><ul><li>Monthly statement lists transactions since the last statement and lists the current balance </li></ul></ul><ul><ul><ul><li>The tear-off portion includes pre-printed information with customer name, account number, and balance </li></ul></ul></ul><ul><ul><ul><li>Customers are asked to return the stub, which serves as the remittance advice </li></ul></ul></ul><ul><ul><ul><li>Remittances are applied against the total balance rather than against a specific invoice </li></ul></ul></ul>
  80. 80. BILLING <ul><ul><li>Advantages of balance-forward method: </li></ul></ul><ul><ul><ul><li>It’s more efficient and reduces costs because you don’t bill for each individual sale </li></ul></ul></ul><ul><ul><ul><li>It’s more convenient for the customer to make one monthly remittance </li></ul></ul></ul>
  81. 81. BILLING <ul><li>Cycle billing is commonly used with the balance-forward method </li></ul><ul><ul><li>Monthly statements are prepared for subsets of customers at different times. </li></ul></ul><ul><ul><ul><li>EXAMPLE: Bill customers according to the following schedule: </li></ul></ul></ul><ul><ul><ul><ul><li>1 st week of month—Last names beginning with A-F </li></ul></ul></ul></ul><ul><ul><ul><ul><li>2 nd week of month—Last names beginning with G-M </li></ul></ul></ul></ul><ul><ul><ul><ul><li>3 rd week of month—Last names beginning with N-S </li></ul></ul></ul></ul><ul><ul><ul><ul><li>4 th week of month—Last names beginning with T-Z </li></ul></ul></ul></ul>
  82. 82. BILLING <ul><li>Advantages of cycle billing: </li></ul><ul><ul><li>Produces more even cash flow </li></ul></ul><ul><ul><li>Produces more even workload </li></ul></ul><ul><ul><li>Doesn’t tie up computer for several days to print statements </li></ul></ul>
  83. 83. BILLING <ul><li>Image processing can improve the efficiency and effectiveness of managing customer accounts. </li></ul><ul><ul><li>Digital images of customer remittances and accounts are stored electronically </li></ul></ul><ul><li>Advantages: </li></ul><ul><ul><li>Fast, easy retrieval </li></ul></ul><ul><ul><li>Copy of document can be instantly transmitted to customer or others </li></ul></ul><ul><ul><li>Multiple people can view document at once </li></ul></ul><ul><ul><li>Drastically reduces document storage space </li></ul></ul>
  84. 84. BILLING <ul><li>EXCEPTION PROCEDURES: ACCOUNT ADJUSTMENTS AND WRITE-OFFS: </li></ul><ul><ul><li>Adjustments to customer accounts may need to be made for: </li></ul></ul><ul><ul><ul><li>Returns </li></ul></ul></ul><ul><ul><ul><li>Allowances for damaged goods </li></ul></ul></ul><ul><ul><ul><li>Write-offs as uncollectible </li></ul></ul></ul><ul><ul><li>These adjustments are handled by the credit manager </li></ul></ul>
  85. 85. BILLING <ul><li>If there’s a return, the credit manager: </li></ul><ul><ul><li>Receives confirmation from the receiving dock that the goods were actually returned to inventory </li></ul></ul><ul><ul><li>Then issues a credit memo which authorizes the crediting of the customer’s account </li></ul></ul><ul><li>If goods are slightly damaged, the customer may agree to keep them for a price reduction </li></ul><ul><ul><li>Credit manager issues a credit memo to reflect that reduction </li></ul></ul>
  86. 86. BILLING <ul><li>Distribution of credit memos: </li></ul><ul><ul><li>One copy to accounts receivable to adjust the customer account </li></ul></ul><ul><ul><li>One copy to the customer </li></ul></ul><ul><li>If repeated attempts to collect payment fail, the credit manager may issue a credit memo to write off an account: </li></ul><ul><ul><li>A copy will not be sent to the customer </li></ul></ul>
  87. 87. BILLING <ul><li>NOTE: Since accounts receivable handles the customer accounts, why does someone else have to issue the credit memos? </li></ul><ul><ul><li>EXAMPLE; An accounts receivable employee could allow a relative or friend (or even himself) to run up an account with the company and then simply write the account off or credit it for returns and allowances. </li></ul></ul><ul><li>Having the credit memos issued by the credit manager is good segregation of duties between: </li></ul><ul><ul><li>Authorizing a transaction (write-off) </li></ul></ul><ul><ul><li>Recording the transaction </li></ul></ul>
  88. 88. REVENUE CYCLE BUSINESS ACTIVITIES <ul><li>Four basic business activities are performed in the revenue cycle: </li></ul><ul><ul><li>Sales order entry </li></ul></ul><ul><ul><li>Shipping </li></ul></ul><ul><ul><li>Billing </li></ul></ul><ul><ul><li>Cash collection </li></ul></ul>
  89. 89. CASH COLLECTIONS <ul><li>The final activity in the revenue cycle is collecting cash from customers </li></ul><ul><li>The cashier, who reports to the treasurer, handles customer remittances and deposits them in the bank </li></ul><ul><li>Because cash and checks are highly vulnerable, controls should be in place to discourage theft </li></ul><ul><ul><li>Accounts receivable personnel should not have access to cash (including checks) </li></ul></ul>
  90. 90. CASH COLLECTIONS <ul><li>Possible approaches to collecting cash: </li></ul><ul><ul><li>Turnaround documents forwarded to accounts receivable </li></ul></ul><ul><li>The mailroom opens customer envelopes and forwards to accounts receivable either: </li></ul><ul><ul><li>Remittance advices </li></ul></ul><ul><ul><li>Photocopies of remittance advices </li></ul></ul><ul><ul><li>A remittance list prepared in the mailroom </li></ul></ul>
  91. 91. CASH COLLECTIONS <ul><li>Possible approaches to collecting cash: </li></ul><ul><ul><li>Turnaround documents forwarded to accounts receivable </li></ul></ul><ul><ul><li>Lockbox arrangements </li></ul></ul><ul><li>Customers remit payments to a bank P.O. box </li></ul><ul><li>The bank sends the company: </li></ul><ul><ul><li>Remittance advices </li></ul></ul><ul><ul><li>An electronic list of the remittances </li></ul></ul><ul><ul><li>Copies of the checks </li></ul></ul><ul><li>Advantages: </li></ul><ul><ul><li>Prevents theft by company employees </li></ul></ul><ul><ul><li>Improves cash flow management </li></ul></ul><ul><ul><ul><li>Lockboxes may be regional, which reduces time in the mail </li></ul></ul></ul><ul><ul><ul><li>Checks are deposited immediately on receipt </li></ul></ul></ul><ul><ul><ul><li>Foreign banks can be utilized for international customers </li></ul></ul></ul>
  92. 92. CASH COLLECTIONS <ul><li>Possible approaches to collecting cash: </li></ul><ul><ul><li>Turnaround documents forwarded to accounts receivable </li></ul></ul><ul><ul><li>Lockbox arrangements </li></ul></ul><ul><ul><li>Electronic lockboxes </li></ul></ul><ul><li>Upon receiving and scanning the checks, the bank immediately sends electronic notification to the company, including: </li></ul><ul><ul><li>Customer account number </li></ul></ul><ul><ul><li>Amount remitted </li></ul></ul>
  93. 93. CASH COLLECTIONS <ul><li>Possible approaches to collecting cash: </li></ul><ul><ul><li>Turnaround documents forwarded to accounts receivable </li></ul></ul><ul><ul><li>Lockbox arrangements </li></ul></ul><ul><ul><li>Electronic lockboxes </li></ul></ul><ul><ul><li>Electronic funds transfer </li></ul></ul><ul><li>Customers remit payment electronically to the company’s bank </li></ul><ul><li>Eliminates mailing delays </li></ul><ul><li>Typically done through banking system’s Automated Clearing House (ACH) network </li></ul><ul><li>PROBLEM: Some banks do not have both EDI and EFT capabilities, which complicates the task of crediting the customer’s account on a timely basis. </li></ul>
  94. 94. CASH COLLECTIONS <ul><li>Possible approaches to collecting cash: </li></ul><ul><ul><li>Turnaround documents forwarded to accounts receivable </li></ul></ul><ul><ul><li>Lockbox arrangements </li></ul></ul><ul><ul><li>Electronic lockboxes </li></ul></ul><ul><ul><li>Electronic funds transfer </li></ul></ul><ul><ul><li>Financial electronic data interchange (FEDI) </li></ul></ul><ul><li>Integrates EFT with EDI </li></ul><ul><li>Remittance data and funds transfer instructions are sent simultaneously by the customer </li></ul><ul><li>Requires that both buyer and seller use EDI-capable banks </li></ul>
  95. 95. CASH COLLECTIONS <ul><li>Possible approaches to collecting cash: </li></ul><ul><ul><li>Turnaround documents forwarded to accounts receivable </li></ul></ul><ul><ul><li>Lockbox arrangements </li></ul></ul><ul><ul><li>Electronic lockboxes </li></ul></ul><ul><ul><li>Electronic funds transfer </li></ul></ul><ul><ul><li>Financial electronic data interchange (FEDI) </li></ul></ul><ul><ul><li>Accept credit cards or procurement cards from customers </li></ul></ul><ul><li>Speeds collection because credit card issuer usually transfers funds within two days </li></ul><ul><li>Typically costs 2-4% of gross sales price </li></ul>
  96. 96. CASH COLLECTIONS <ul><li>Possible approaches to collecting cash: </li></ul><ul><ul><li>Turnaround documents forwarded to accounts receivable </li></ul></ul><ul><ul><li>Lockbox arrangements </li></ul></ul><ul><ul><li>Electronic lockboxes </li></ul></ul><ul><ul><li>Electronic funds transfer </li></ul></ul><ul><ul><li>Financial electronic data interchange (FEDI) </li></ul></ul><ul><ul><li>Accept credit cards or procurement cards from customers </li></ul></ul><ul><ul><li>Electronic bill payment </li></ul></ul>
  97. 97. REVIEW OF REVENUE CYCLE ACTIVITIES <ul><li>Before we move on to discuss internal controls in the revenue cycle, let’s do a brief review of the organization chart, including: </li></ul><ul><ul><li>Who does what in the revenue cycle </li></ul></ul><ul><ul><li>To whom they typically report </li></ul></ul>
  98. 98. PARTIAL ORGANIZATION CHART FOR UNITS INVOLVED IN REVENUE CYCLE <ul><li>Takes customer orders </li></ul><ul><li>Authorizes credit for existing customers in good standing </li></ul><ul><li>Checks inventory availability </li></ul>
  99. 99. PARTIAL ORGANIZATION CHART FOR UNITS INVOLVED IN REVENUE CYCLE <ul><li>Responds to customer inquiries </li></ul>
  100. 100. PARTIAL ORGANIZATION CHART FOR UNITS INVOLVED IN REVENUE CYCLE <ul><li>Picks the order </li></ul>
  101. 101. PARTIAL ORGANIZATION CHART FOR UNITS INVOLVED IN REVENUE CYCLE <ul><li>Packs the order </li></ul><ul><li>Ships the order </li></ul>
  102. 102. PARTIAL ORGANIZATION CHART FOR UNITS INVOLVED IN REVENUE CYCLE <ul><li>Invoices the customer </li></ul>
  103. 103. PARTIAL ORGANIZATION CHART FOR UNITS INVOLVED IN REVENUE CYCLE <ul><li>Maintains the customer’s account: </li></ul><ul><ul><li>Increases customer account when sales are made </li></ul></ul><ul><ul><li>Decreases account when cash is collected </li></ul></ul>
  104. 104. PARTIAL ORGANIZATION CHART FOR UNITS INVOLVED IN REVENUE CYCLE <ul><li>Approves credit for new customers or existing customers with issues </li></ul><ul><li>Authorizes credits to customer accounts for returns, allowances, and write-offs </li></ul>
  105. 105. PARTIAL ORGANIZATION CHART FOR UNITS INVOLVED IN REVENUE CYCLE <ul><li>Deposits cash received from customers </li></ul>
  106. 106. CONTROL: OBJECTIVES, THREATS, AND PROCEDURES <ul><li>In the revenue cycle (or any cycle), a well-designed AIS should provide adequate controls to ensure that the following objectives are met: </li></ul><ul><ul><li>All transactions are properly authorized </li></ul></ul><ul><ul><li>All recorded transactions are valid </li></ul></ul><ul><ul><li>All valid and authorized transactions are recorded </li></ul></ul><ul><ul><li>All transactions are recorded accurately </li></ul></ul><ul><ul><li>Assets are safeguarded from loss or theft </li></ul></ul><ul><ul><li>Business activities are performed efficiently and effectively </li></ul></ul><ul><ul><li>The company is in compliance with all applicable laws and regulations </li></ul></ul><ul><ul><li>All disclosures are full and fair </li></ul></ul>
  107. 107. CONTROL: OBJECTIVES, THREATS, AND PROCEDURES <ul><li>We’ll soon be discussing the threats that may occur in the revenue cycle. </li></ul><ul><li>If you understand the preceding objectives, you probably won’t have to worry about “memorizing” threats. </li></ul><ul><li>Almost every threat represents a violation of one of those control objectives. </li></ul><ul><li>Let’s look more closely. </li></ul>
  108. 108. CONTROL: OBJECTIVES, THREATS, AND PROCEDURES <ul><li>In the revenue cycle (or any cycle), a well-designed AIS should provide adequate controls to ensure that the following objectives are met: </li></ul><ul><ul><li>All transactions are properly authorized </li></ul></ul><ul><ul><li>All recorded transactions are valid </li></ul></ul><ul><ul><li>All valid and authorized transactions are recorded </li></ul></ul><ul><ul><li>All transactions are recorded accurately </li></ul></ul><ul><ul><li>Assets are safeguarded from loss or theft </li></ul></ul><ul><ul><li>Business activities are performed efficiently and effectively </li></ul></ul><ul><ul><li>The company is in compliance with all applicable laws and regulations </li></ul></ul><ul><ul><li>All disclosures are full and fair </li></ul></ul><ul><li>A related threat would be that a transaction would go through without proper authorization. </li></ul><ul><li>Such a transaction might result from either a mistake or a fraud. </li></ul><ul><li>EXAMPLE: An employee might process an unauthorized write-off of his own account, so that he wouldn’t have to pay. </li></ul>
  109. 109. CONTROL: OBJECTIVES, THREATS, AND PROCEDURES <ul><li>In the revenue cycle (or any cycle), a well-designed AIS should provide adequate controls to ensure that the following objectives are met: </li></ul><ul><ul><li>All transactions are properly authorized </li></ul></ul><ul><ul><li>All recorded transactions are valid </li></ul></ul><ul><ul><li>All valid and authorized transactions are recorded </li></ul></ul><ul><ul><li>All transactions are recorded accurately </li></ul></ul><ul><ul><li>Assets are safeguarded from loss or theft </li></ul></ul><ul><ul><li>Business activities are performed efficiently and effectively </li></ul></ul><ul><ul><li>The company is in compliance with all applicable laws and regulations </li></ul></ul><ul><ul><li>All disclosures are full and fair </li></ul></ul><ul><li>The related threat is that a transaction would be recorded that isn’t valid, i.e., it didn’t actually occur. </li></ul><ul><li>EXAMPLE 1: An employee records a return of merchandise on his own account when the goods were never really returned. </li></ul><ul><li>EXAMPLE 2: Many financial statement frauds involve companies recording totally fictitious revenues in order to make the company’s financial position appear more favorable than it actually is. </li></ul>
  110. 110. CONTROL: OBJECTIVES, THREATS, AND PROCEDURES <ul><li>In the revenue cycle (or any cycle), a well-designed AIS should provide adequate controls to ensure that the following objectives are met: </li></ul><ul><ul><li>All transactions are properly authorized </li></ul></ul><ul><ul><li>All recorded transactions are valid </li></ul></ul><ul><ul><li>All valid and authorized transactions are recorded </li></ul></ul><ul><ul><li>All transactions are recorded accurately </li></ul></ul><ul><ul><li>Assets are safeguarded from loss or theft </li></ul></ul><ul><ul><li>Business activities are performed efficiently and effectively </li></ul></ul><ul><ul><li>The company is in compliance with all applicable laws and regulations </li></ul></ul><ul><ul><li>All disclosures are full and fair </li></ul></ul><ul><li>The related threat would be that a transaction that actually did occur didn’t get recorded. </li></ul><ul><li>EXAMPLE 1: An employee fails to record a sale that the company made to him so he won’t have to pay the receivable. </li></ul><ul><li>EXAMPLE 2: In financial statement fraud cases, the company often fails to record transactions that reduce income or net assets, e.g., don’t record returns from customers or discounts granted to them. This omission causes net sales to appear higher than they really are. </li></ul>
  111. 111. CONTROL: OBJECTIVES, THREATS, AND PROCEDURES <ul><li>In the revenue cycle (or any cycle), a well-designed AIS should provide adequate controls to ensure that the following objectives are met: </li></ul><ul><ul><li>All transactions are properly authorized </li></ul></ul><ul><ul><li>All recorded transactions are valid </li></ul></ul><ul><ul><li>All valid and authorized transactions are recorded </li></ul></ul><ul><ul><li>All transactions are recorded accurately </li></ul></ul><ul><ul><li>Assets are safeguarded from loss or theft </li></ul></ul><ul><ul><li>Business activities are performed efficiently and effectively </li></ul></ul><ul><ul><li>The company is in compliance with all applicable laws and regulations </li></ul></ul><ul><ul><li>All disclosures are full and fair </li></ul></ul><ul><li>The threat would be that a transaction is recorded inaccurately. Inaccurate recording typically means that a transaction is recorded either: </li></ul><ul><ul><li>In the wrong amount </li></ul></ul><ul><ul><li>In the wrong account </li></ul></ul><ul><ul><li>In the wrong time period </li></ul></ul><ul><li>It could also mean that the transaction was credited to the wrong agents or participants. </li></ul>
  112. 112. CONTROL: OBJECTIVES, THREATS, AND PROCEDURES <ul><li>In the revenue cycle (or any cycle), a well-designed AIS should provide adequate controls to ensure that the following objectives are met: </li></ul><ul><ul><li>All transactions are properly authorized </li></ul></ul><ul><ul><li>All recorded transactions are valid </li></ul></ul><ul><ul><li>All valid and authorized transactions are recorded </li></ul></ul><ul><ul><li>All transactions are recorded accurately </li></ul></ul><ul><ul><li>Assets are safeguarded from loss or theft </li></ul></ul><ul><ul><li>Business activities are performed efficiently and effectively </li></ul></ul><ul><ul><li>The company is in compliance with all applicable laws and regulations </li></ul></ul><ul><ul><li>All disclosures are full and fair </li></ul></ul><ul><li>EXAMPLES: A fraud might involve a company: </li></ul><ul><ul><li>Over-recording the amount of a sale (wrong amount) </li></ul></ul><ul><ul><li>Recording an unearned revenue as an earned revenue (wrong account) </li></ul></ul><ul><ul><li>Recording a sale earlier than it occurs (wrong time period) </li></ul></ul><ul><ul><li>Crediting the wrong salesperson for the sale (wrong agent) </li></ul></ul>
  113. 113. CONTROL: OBJECTIVES, THREATS, AND PROCEDURES <ul><li>In the revenue cycle (or any cycle), a well-designed AIS should provide adequate controls to ensure that the following objectives are met: </li></ul><ul><ul><li>All transactions are properly authorized </li></ul></ul><ul><ul><li>All recorded transactions are valid </li></ul></ul><ul><ul><li>All valid and authorized transactions are recorded </li></ul></ul><ul><ul><li>All transactions are recorded accurately </li></ul></ul><ul><ul><li>Assets are safeguarded from loss or theft </li></ul></ul><ul><ul><li>Business activities are performed efficiently and effectively </li></ul></ul><ul><ul><li>The company is in compliance with all applicable laws and regulations </li></ul></ul><ul><ul><li>All disclosures are full and fair </li></ul></ul><ul><li>The reverse side of these activities might include: </li></ul><ul><ul><li>Under-recording a sales return (wrong amount). </li></ul></ul><ul><ul><li>Debiting an asset account instead of sales returns (wrong account) </li></ul></ul><ul><ul><li>Recording the return later than it actually occurred (wrong time period) </li></ul></ul>
  114. 114. CONTROL: OBJECTIVES, THREATS, AND PROCEDURES <ul><li>In the revenue cycle (or any cycle), a well-designed AIS should provide adequate controls to ensure that the following objectives are met: </li></ul><ul><ul><li>All transactions are properly authorized </li></ul></ul><ul><ul><li>All recorded transactions are valid </li></ul></ul><ul><ul><li>All valid and authorized transactions are recorded </li></ul></ul><ul><ul><li>All transactions are recorded accurately </li></ul></ul><ul><ul><li>Assets are safeguarded from loss or theft </li></ul></ul><ul><ul><li>Business activities are performed efficiently and effectively </li></ul></ul><ul><ul><li>The company is in compliance with all applicable laws and regulations </li></ul></ul><ul><ul><li>All disclosures are full and fair </li></ul></ul><ul><li>Threats in this area usually involve theft, destruction, or misuse of assets, including data. </li></ul>
  115. 115. CONTROL: OBJECTIVES, THREATS, AND PROCEDURES <ul><li>In the revenue cycle (or any cycle), a well-designed AIS should provide adequate controls to ensure that the following objectives are met: </li></ul><ul><ul><li>All transactions are properly authorized </li></ul></ul><ul><ul><li>All recorded transactions are valid </li></ul></ul><ul><ul><li>All valid and authorized transactions are recorded </li></ul></ul><ul><ul><li>All transactions are recorded accurately </li></ul></ul><ul><ul><li>Assets are safeguarded from loss or theft </li></ul></ul><ul><ul><li>Business activities are performed efficiently and effectively </li></ul></ul><ul><ul><li>The company is in compliance with all applicable laws and regulations </li></ul></ul><ul><ul><li>All disclosures are full and fair </li></ul></ul><ul><li>The threat is that the activities would be performed inefficiently or ineffectively. </li></ul>
  116. 116. CONTROL: OBJECTIVES, THREATS, AND PROCEDURES <ul><li>In the revenue cycle (or any cycle), a well-designed AIS should provide adequate controls to ensure that the following objectives are met: </li></ul><ul><ul><li>All transactions are properly authorized </li></ul></ul><ul><ul><li>All recorded transactions are valid </li></ul></ul><ul><ul><li>All valid and authorized transactions are recorded </li></ul></ul><ul><ul><li>All transactions are recorded accurately </li></ul></ul><ul><ul><li>Assets are safeguarded from loss or theft </li></ul></ul><ul><ul><li>Business activities are performed efficiently and effectively </li></ul></ul><ul><ul><li>The company is in compliance with all applicable laws and regulations </li></ul></ul><ul><ul><li>All disclosures are full and fair </li></ul></ul><ul><li>The obvious threat is non-compliance with laws and regulations. </li></ul><ul><li>An example in the revenue cycle could be a car dealer who: </li></ul><ul><ul><li>Sells a vehicle to which he doesn’t have clear title; or </li></ul></ul><ul><ul><li>Refuses to allow a customer to return a car in violation of state lemon laws. </li></ul></ul><ul><li>Another example might be requesting a credit check on a customer in violation of the Fair Credit Reporting Act (FCRA). </li></ul>
  117. 117. CONTROL: OBJECTIVES, THREATS, AND PROCEDURES <ul><li>In the revenue cycle (or any cycle), a well-designed AIS should provide adequate controls to ensure that the following objectives are met: </li></ul><ul><ul><li>All transactions are properly authorized </li></ul></ul><ul><ul><li>All recorded transactions are valid </li></ul></ul><ul><ul><li>All valid and authorized transactions are recorded </li></ul></ul><ul><ul><li>All transactions are recorded accurately </li></ul></ul><ul><ul><li>Assets are safeguarded from loss or theft </li></ul></ul><ul><ul><li>Business activities are performed efficiently and effectively </li></ul></ul><ul><ul><li>The company is in compliance with all applicable laws and regulations </li></ul></ul><ul><ul><li>All disclosures are full and fair </li></ul></ul><ul><li>The threat is incomplete and/or misleading disclosures. </li></ul><ul><li>This threat is more important in other areas, particularly those areas that involve liabilities and contingencies. </li></ul><ul><li>However, one threat in the revenue cycle could be misleading disclosures about customers’ rights to return product. </li></ul>
  118. 118. CONTROL: OBJECTIVES, THREATS, AND PROCEDURES <ul><li>While we’re going to step through a number of common threats in the revenue cycle, it’s a good idea to memorize the internal control objectives so you can think of the relevant threats on your own. </li></ul><ul><li>If you don’t like the text version, click on the button below to see a rhyming version of the same objectives. </li></ul>Poet’s Corner
  119. 119. CONTROL: OBJECTIVES, THREATS, AND PROCEDURES <ul><li>Internal control is just a ballad. </li></ul><ul><li>Are all recorded transactions valid? </li></ul><ul><li>Are all valid transactions recorded? </li></ul><ul><li>If not, there may be something sordid. </li></ul><ul><li>And it should cause severe distraction </li></ul><ul><li>If no one’s authorized the transaction. </li></ul>
  120. 120. CONTROL: OBJECTIVES, THREATS, AND PROCEDURES <ul><li>Are entries in the right amount? </li></ul><ul><li>Are they in the right account? </li></ul><ul><li>Are they down in the right time? </li></ul><ul><li>If not, your little bells should chime. </li></ul><ul><li>Are we efficient? Are we effective? </li></ul><ul><li>Is our compliance with the law defective? </li></ul><ul><li>Are assets really and safely there? </li></ul><ul><li>Are all disclosures full and fair? </li></ul>
  121. 121. CONTROL: OBJECTIVES, THREATS, AND PROCEDURES <ul><li>There are several actions a company can take with respect to any cycle to reduce threats of errors or irregularities. These include: </li></ul><ul><ul><li>Using simple, easy-to-complete documents with clear instructions (enhances accuracy and reliability). </li></ul></ul><ul><ul><li>Using appropriate application controls, such as validity checks and field checks (enhances accuracy and reliability). </li></ul></ul><ul><ul><li>Providing space on forms to record who completed and who reviewed the form (encourages proper authorizations and accountability). </li></ul></ul>
  122. 122. CONTROL: OBJECTIVES, THREATS, AND PROCEDURES <ul><ul><li>Pre-numbering documents (encourages recording of valid and only valid transactions). </li></ul></ul><ul><ul><li>Restricting access to blank documents (reduces risk of unauthorized transaction). </li></ul></ul><ul><li>In the following sections, we’ll discuss the threats that may arise in the four major steps of the revenue cycle, as well as the controls that can prevent those threats. </li></ul>
  123. 123. THREATS IN SALES ORDER ENTRY <ul><li>The primary objectives of this process: </li></ul><ul><ul><li>Accurately and efficiently process customer orders. </li></ul></ul><ul><ul><li>Ensure that all sales are legitimate and that the company gets paid for all sales </li></ul></ul><ul><ul><li>Minimize revenue loss arising from poor inventory management </li></ul></ul>
  124. 124. THREATS IN SALES ORDER ENTRY <ul><li>Threats in the sales order entry process include: </li></ul><ul><ul><li>THREAT 1: Incomplete or inaccurate customer orders </li></ul></ul><ul><ul><li>THREAT 2: Sales to customers with poor credit </li></ul></ul><ul><ul><li>THREAT 3: Orders that are not legitimate </li></ul></ul><ul><ul><li>THREAT 4: Stockouts , carrying costs, and markdowns </li></ul></ul><ul><li>You can click on any of the threats below to get more information on: </li></ul><ul><ul><li>The types of problems posed by each threat </li></ul></ul><ul><ul><li>The controls that can mitigate the threats. </li></ul></ul>
  125. 125. THREATS IN SALES ORDER ENTRY <ul><li>THREAT NO. 1—INCOMPLETE OR INACCURATE CUSTOMER ORDER </li></ul><ul><ul><li>Why is this a problem? </li></ul></ul><ul><ul><ul><li>It’s inefficient. The customer has to be re-contacted, and the order has to be re-entered. </li></ul></ul></ul><ul><ul><ul><li>Causes customer dissatisfaction and may impact future sales. </li></ul></ul></ul><ul><ul><li>Controls: </li></ul></ul><ul><ul><ul><li>Data entry controls, such as completeness checks </li></ul></ul></ul><ul><ul><ul><li>Automatic lookup of reference data like customer address </li></ul></ul></ul><ul><ul><ul><li>Reasonableness tests comparing quantity ordered to past history </li></ul></ul></ul>Return to Threat Menu Go To Next Threat
  126. 126. THREATS IN SALES ORDER ENTRY <ul><li>THREAT NO. 2—SALES TO CUSTOMERS WITH POOR CREDIT </li></ul><ul><ul><li>Why is this a problem? </li></ul></ul><ul><ul><ul><li>Sales may be uncollectible, resulting in lost assets or revenues. </li></ul></ul></ul><ul><ul><li>Controls: </li></ul></ul><ul><ul><ul><li>Follow proper authorization procedures for credit sales, e.g.: </li></ul></ul></ul><ul><ul><ul><ul><li>Setting credit limits for each customer. </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Granting general authorization to sales order staff for customers who are: </li></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Existing customers </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Under their credit limits </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>With no outstanding balances </li></ul></ul></ul></ul></ul>
  127. 127. THREATS IN SALES ORDER ENTRY <ul><ul><ul><li>Other cases require specific authorization by someone other than the sales rep (usually done by the credit manager). This type of authorization is especially important if the sales rep is paid on commission. </li></ul></ul></ul><ul><ul><ul><li>Salespeople should have read-only access to customer credit data. </li></ul></ul></ul><ul><ul><ul><li>Credit should be approved prior to releasing goods from inventory. </li></ul></ul></ul><ul><ul><ul><li>Accurate records of customer balances and credit limits must be maintained (the decision is only as good as the information provided). </li></ul></ul></ul>Return to Threat Menu Go To Next Threat
  128. 128. THREATS IN SALES ORDER ENTRY <ul><li>THREAT NO. 3—ORDERS THAT ARE NOT LEGITIMATE </li></ul><ul><ul><li>Why is this a problem? </li></ul></ul><ul><ul><ul><li>You can’t make good credit decisions or collect from a customer you haven’t properly identified. </li></ul></ul></ul><ul><ul><ul><li>EXAMPLE: An Oklahoma office supply store accepted a telephone order for goods that were subsequently shipped to a woman in Indiana. Afterwards, the store discovered that the order had been called in from a prison inmate for shipment to his mom on Mother’s Day. The inmate had used a stolen credit card number. The office supply store ate the loss. </li></ul></ul></ul>
  129. 129. THREATS IN SALES ORDER ENTRY <ul><ul><ul><li>Traditionally, legitimacy of customer orders is established by receipt of a signed purchase order from the customer. </li></ul></ul></ul><ul><ul><ul><li>Digital signatures and digital certificates provide similar control for electronic business transactions. </li></ul></ul></ul><ul><ul><ul><li>Online credit card transactions with retail customers are fraught with issues. </li></ul></ul></ul>
  130. 130. THREATS IN SALES ORDER ENTRY <ul><ul><ul><li>Some actions companies are taking with online or phone-order retail customers: </li></ul></ul></ul><ul><ul><ul><ul><li>Requiring the three-digit code on the back of the credit card for confirmation that the customer physically possesses the card. </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Requiring that customers use PayPal. </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Sending emails to the customer to confirm the transaction. </li></ul></ul></ul></ul>Return to Threat Menu Go To Next Threat
  131. 131. THREATS IN SALES ORDER ENTRY <ul><li>THREAT NO. 4—STOCKOUTS, CARRYING COSTS, AND MARKDOWNS </li></ul><ul><ul><li>Why is this a problem? </li></ul></ul><ul><ul><ul><li>If you run out of merchandise, you may lose sales. </li></ul></ul></ul><ul><ul><ul><li>If you carry too much merchandise, you incur excess carrying costs and/or have to mark the inventory down to sell it. </li></ul></ul></ul><ul><ul><li>Controls: </li></ul></ul><ul><ul><ul><li>Accurate inventory control and sales forecasting systems. </li></ul></ul></ul><ul><ul><ul><li>Online inventory systems that allow recording of changes to inventory in real time. </li></ul></ul></ul>
  132. 132. THREATS IN SALES ORDER ENTRY <ul><ul><ul><li>Periodic physical counts of inventory to verify accuracy of the records. </li></ul></ul></ul><ul><ul><ul><li>Regular review of sales forecasts to make adjustments. </li></ul></ul></ul>Return to Threat Menu Go To Next Threat
  133. 133. THREATS IN SHIPPING <ul><li>The primary objectives of the shipping process are: </li></ul><ul><ul><li>Fill customer orders efficiently and accurately </li></ul></ul><ul><ul><li>Safeguard inventory </li></ul></ul><ul><li>Threats in the shipping process include: </li></ul><ul><ul><li>THREAT 5: Shipping Errors </li></ul></ul><ul><ul><li>THREAT 6: Theft of Inventory </li></ul></ul><ul><li>You can click on any of the threats above to get more information on: </li></ul><ul><ul><li>The types of problems posed by each threat </li></ul></ul><ul><ul><li>The controls that can mitigate the threats. </li></ul></ul>
  134. 134. THREATS IN SHIPPING <ul><li>THREAT NO. 5—SHIPPING ERRORS </li></ul><ul><ul><li>Why is this a problem? </li></ul></ul><ul><ul><ul><li>Customer dissatisfaction and lost sales may occur if customers are shipped the wrong items or there are delays because of a wrong address. </li></ul></ul></ul><ul><ul><ul><li>Shipping to the wrong address may also result in loss of the assets. </li></ul></ul></ul><ul><ul><li>Controls: </li></ul></ul><ul><ul><ul><li>Online shipping systems can require shipping clerks to enter the quantities being shipped before the goods are actually shipped. Errors can thus be detected and corrected before shipment. </li></ul></ul></ul>
  135. 135. THREATS IN SHIPPING <ul><ul><ul><li>Use of bar code scanners and RFID tags to record picking and shipping. </li></ul></ul></ul><ul><ul><ul><li>If data entry is performed manually, application controls such as field checks and completeness tests can reduce errors. </li></ul></ul></ul><ul><ul><ul><li>The packing slip and bill of lading should not be printed until accuracy of the shipment has been verified. </li></ul></ul></ul>Return to Threat Menu Go To Next Threat
  136. 136. THREATS IN SHIPPING <ul><li>THREAT NO. 6—THEFT OF INVENTORY </li></ul><ul><ul><li>Why is this a problem? </li></ul></ul><ul><ul><ul><li>Loss of assets </li></ul></ul></ul><ul><ul><ul><li>Inaccurate inventory records (since thieves don’t generally record the reduction in inventory) </li></ul></ul></ul><ul><ul><li>Controls: </li></ul></ul><ul><ul><ul><li>Inventory should be kept in a secure location with restricted access. </li></ul></ul></ul><ul><ul><ul><li>Inventory transfers should be documented. </li></ul></ul></ul><ul><ul><ul><li>Inventory should be released for shipping only with approved sales orders. </li></ul></ul></ul>
  137. 137. THREATS IN SHIPPING <ul><ul><ul><li>Employees who handle inventory should sign the documents or enter their codes online so that accountability for losses can be traced. </li></ul></ul></ul><ul><ul><ul><li>Wireless communication and RFID tags can provide real-time tracking, which may reduce thefts while in transit. </li></ul></ul></ul><ul><ul><ul><li>Physical counts of inventory should be made periodically, and employees with custody should be held accountable for shortages. </li></ul></ul></ul>Return to Threat Menu Go To Next Threat
  138. 138. THREATS IN BILLING <ul><li>The primary objectives of the billing process are to ensure: </li></ul><ul><ul><li>Customers are billed for all sales </li></ul></ul><ul><ul><li>Invoices are accurate </li></ul></ul><ul><ul><li>Customer accounts are accurately maintained </li></ul></ul><ul><li>Threats that relate to this process are: </li></ul><ul><ul><li>THREAT 7: Failure to bill customers </li></ul></ul><ul><ul><li>THREAT 8: Billing errors </li></ul></ul><ul><ul><li>THREAT 9: Errors in maintaining customer accounts </li></ul></ul><ul><li>You can click on any of the threats below to get more information on: </li></ul><ul><ul><li>The types of problems posed by each threat </li></ul></ul><ul><ul><li>The controls that can mitigate the threats. </li></ul></ul>
  139. 139. THREATS IN BILLING <ul><li>THREAT NO. 7—FAILURE TO BILL CUSTOMERS </li></ul><ul><ul><li>Why is this a problem? </li></ul></ul><ul><ul><ul><li>Loss of assets and revenues </li></ul></ul></ul><ul><ul><ul><li>Inaccurate data on sales, inventory, and accounts receivable </li></ul></ul></ul><ul><ul><li>Controls: </li></ul></ul><ul><ul><ul><li>Segregate shipping and billing functions. (An employee who does both could ship merchandise to friends without billing them.) </li></ul></ul></ul>
  140. 140. THREATS IN BILLING <ul><ul><ul><li>Sales orders, picking tickets, packing slips, and sales invoices should be sequentially numbered and periodically accounted for. (If you can’t match an invoice to every sales order or packing slip, the customer hasn’t been billed.) </li></ul></ul></ul><ul><ul><ul><li>In invoice-less systems, you must ensure that every shipment is recorded, since the shipment triggers recording of the account receivable. </li></ul></ul></ul>Return to Threat Menu Go To Next Threat
  141. 141. THREATS IN BILLING <ul><li>THREAT NO. 8—BILLING ERRORS </li></ul><ul><ul><li>Why is this a problem? </li></ul></ul><ul><ul><ul><li>Loss of assets if you under-bill </li></ul></ul></ul><ul><ul><ul><li>Customer dissatisfaction if you over-bill </li></ul></ul></ul><ul><ul><li>Controls: </li></ul></ul><ul><ul><ul><li>Have the computer retrieve prices from the inventory master file. </li></ul></ul></ul><ul><ul><ul><li>Avoid quantity errors by checking quantities on the packing slip against quantities on the sales order. </li></ul></ul></ul><ul><ul><ul><li>Bar code scanners can also reduce data entry errors. </li></ul></ul></ul>Return to Threat Menu Go To Next Threat
  142. 142. THREATS IN BILLING <ul><li>THREAT NO. 9—ERRORS IN MAINTAINING CUSTOMER ACCOUNTS </li></ul><ul><ul><li>Why is this a problem? </li></ul></ul><ul><ul><ul><li>Leads to customer dissatisfaction and loss of future sales </li></ul></ul></ul><ul><ul><ul><li>May indicate theft of cash </li></ul></ul></ul><ul><ul><li>Controls: </li></ul></ul><ul><ul><ul><li>Edit checks such as: </li></ul></ul></ul><ul><ul><ul><ul><li>Validity checks on customer and invoice numbers so amounts are applied to the correct account </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Closed-loop verification </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Field check to ensure payment amounts are numeric </li></ul></ul></ul></ul>
  143. 143. THREATS IN BILLING <ul><ul><ul><li>Batch totals to detect posting errors. </li></ul></ul></ul><ul><ul><ul><li>Compare number of accounts updated with number of checks received. </li></ul></ul></ul><ul><ul><ul><li>Reconciliations performed by an independent party. </li></ul></ul></ul><ul><ul><ul><li>Sending monthly statements to every customer to provide independent review. </li></ul></ul></ul>Return to Threat Menu Go To Next Threat
  144. 144. THREATS IN CASH COLLECTION <ul><li>The primary objective of the cash collection process: </li></ul><ul><ul><li>Safeguard customer remittances </li></ul></ul><ul><li>The major threat to this process: </li></ul><ul><ul><li>THREAT 10: Theft of cash </li></ul></ul><ul><li>You can click on the above threat to get more information on: </li></ul><ul><ul><li>The types of problems posed by the threat </li></ul></ul><ul><ul><li>The controls that can mitigate the threat </li></ul></ul>
  145. 145. THREATS IN CASH COLLECTION <ul><li>THREAT NO. 10—THEFT OF CASH </li></ul><ul><ul><li>Why is this a problem? </li></ul></ul><ul><ul><ul><li>Loss of cash </li></ul></ul></ul><ul><ul><li>Controls: </li></ul></ul><ul><ul><ul><li>Segregation of duties between: </li></ul></ul></ul><ul><ul><ul><ul><li>Handling cash and posting to customer accounts. (A person who can do both can lap accounts.) </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Handling cash and authorizing credit memos. (A person who does both could steal a customer remittance and authorize a credit to the customer’s account, so the customer won’t be notified he’s past due.) </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Authorizing credit memos and maintaining customer accounts. (A person who does both could write of an account for himself, family members, or friends.) </li></ul></ul></ul></ul>
  146. 146. THREATS IN CASH COLLECTION <ul><ul><ul><li>Minimizing the handling of money and checks through lockbox arrangements, etc. </li></ul></ul></ul><ul><ul><ul><li>Prompt documentation and restrictive endorsements of customer remittances. </li></ul></ul></ul><ul><ul><ul><li>Two people opening mail together. </li></ul></ul></ul><ul><ul><ul><li>Remittance data sent to accounts receivable while cash and checks are sent to cashier. </li></ul></ul></ul><ul><ul><ul><li>Checking that total credits to accounts receivable equal total debits to cash. </li></ul></ul></ul><ul><ul><ul><li>Sending copy of remittance list to internal auditing to be compared with validated deposit slips and bank statements (verifies all checks were deposited). </li></ul></ul></ul>
  147. 147. THREATS IN CASH COLLECTION <ul><ul><ul><li>Sending monthly statements to customers to provide independent review. </li></ul></ul></ul><ul><ul><ul><li>Using cash registers in retail establishments that automatically produce a written record of all cash received. </li></ul></ul></ul><ul><ul><ul><li>Offering inducements to customers to look at their receipts (so they’ll notice if a clerk rings up a sale incorrectly). </li></ul></ul></ul><ul><ul><ul><li>Deposit all remittances in the bank daily (facilitates accurate reconciliations and safeguards cash). </li></ul></ul></ul><ul><ul><ul><li>Having bank reconciliations done by an independent party. </li></ul></ul></ul>Return to Threat Menu Go To Next Threat
  148. 148. GENERAL CONTROL ISSUES <ul><li>Two general objectives pertain to activities in every cycle: </li></ul><ul><ul><li>Accurate data should be available when needed </li></ul></ul><ul><ul><li>Activities should be performed efficiently and effectively </li></ul></ul><ul><li>The related general threats are: </li></ul><ul><ul><li>THREAT 11: Loss, Alteration, or Unauthorized Disclosure of Data </li></ul></ul><ul><ul><li>THREAT 12: Poor performance </li></ul></ul><ul><li>You can click on any of the threats below to get more information on: </li></ul><ul><ul><li>The types of problems posed by each threat </li></ul></ul><ul><ul><li>The controls that can mitigate the threats. </li></ul></ul>
  149. 149. GENERAL CONTROL ISSUES <ul><li>THREAT NO. 11—LOSS, ALTERATION, OR UNAUTHORIZED DISCLOSURE OF DATA </li></ul><ul><ul><li>Why is this a problem? </li></ul></ul><ul><ul><ul><li>Loss of all accounts receivable data could threaten a company’s continued existence. </li></ul></ul></ul><ul><ul><ul><li>Loss or alteration of data could cause: </li></ul></ul></ul><ul><ul><ul><ul><li>Errors in external or internal reporting. </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Inaccurate responses to customer inquiries. </li></ul></ul></ul></ul><ul><ul><ul><li>Unauthorized disclosure of confidential customer information can cause: </li></ul></ul></ul><ul><ul><ul><ul><li>Dissatisfied customers and loss of future sales </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Legal sanctions and fines </li></ul></ul></ul></ul>
  150. 150. GENERAL CONTROL ISSUES <ul><ul><li>Controls: </li></ul></ul><ul><ul><ul><li>The sales file, cash receipts file, accounts receivable master file, and most recent transaction file should be backed up regularly. </li></ul></ul></ul><ul><ul><ul><ul><li>At least one backup on site and one offsite. </li></ul></ul></ul></ul><ul><ul><ul><li>All disks and tapes should have external and internal files to reduce chance of accidentally erasing important data. </li></ul></ul></ul><ul><ul><ul><li>Access controls should be utilized: </li></ul></ul></ul><ul><ul><ul><ul><li>User IDs and passwords </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Compatibility matrices </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Controls for individual terminals (e.g., so the receiving dock can’t enter a sales order) </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Logs of all activities, particularly those requiring specific authorizations </li></ul></ul></ul></ul>
  151. 151. GENERAL CONTROL ISSUES <ul><ul><ul><li>Default settings on ERP systems usually allow users far too much access to data, so these systems must be modified to enforce proper segregation of duties. </li></ul></ul></ul><ul><ul><ul><li>Sensitive data should be encrypted in storage and in transmission. </li></ul></ul></ul><ul><ul><ul><li>Websites should use SSL for secure customer communications. </li></ul></ul></ul><ul><ul><ul><li>Parity checks, acknowledgment messages, and control totals should be used to ensure transmission accuracy. </li></ul></ul></ul>Return to Threat Menu Go To Next Threat
  152. 152. GENERAL CONTROL ISSUES <ul><li>THREAT NO. 12—POOR PERFORMANCE </li></ul><ul><ul><li>Why is this a problem? </li></ul></ul><ul><ul><ul><li>May damage customer relations </li></ul></ul></ul><ul><ul><ul><li>Reduces profitability </li></ul></ul></ul><ul><ul><li>Controls: </li></ul></ul><ul><ul><ul><li>Prepare and review performance reports </li></ul></ul></ul>Return to Threat Menu Go To Next Threat
  153. 153. REVENUE CYCLE INFORMATION NEEDS <ul><li>We’ve examined the various threats in the revenue cycle and the controls that can mitigate those threats. </li></ul><ul><li>Let’s move on to summarize the information needs in the revenue cycle. </li></ul>
  154. 154. REVENUE CYCLE INFORMATION NEEDS <ul><li>Information is needed for the following operational tasks in the revenue cycle: </li></ul><ul><ul><li>Responding to customer inquiries </li></ul></ul><ul><ul><li>Deciding on extending credit to a customer </li></ul></ul><ul><ul><li>Determining inventory availability </li></ul></ul><ul><ul><li>Selecting merchandise delivery methods </li></ul></ul>
  155. 155. REVENUE CYCLE INFORMATION NEEDS <ul><li>Information is needed for the following strategic decisions: </li></ul><ul><ul><li>Setting prices for products/services </li></ul></ul><ul><ul><li>Establishing policies on returns and warranties </li></ul></ul><ul><ul><li>Deciding on credit terms </li></ul></ul><ul><ul><li>Determining short-term borrowing needs </li></ul></ul><ul><ul><li>Planning new marketing campaigns </li></ul></ul>
  156. 156. REVENUE CYCLE INFORMATION NEEDS <ul><li>The AIS needs to provide information to evaluate performance of the following: </li></ul><ul><ul><li>Response time to customer inquiries </li></ul></ul><ul><ul><li>Time to fill and deliver orders </li></ul></ul><ul><ul><li>Percentage of sales orders back ordered </li></ul></ul><ul><ul><li>Customer satisfaction rates and trends </li></ul></ul><ul><ul><li>Analyses of market share and sales trends </li></ul></ul><ul><ul><li>Profitability by product, customer, and region </li></ul></ul><ul><ul><li>Sales volume in dollars and market share </li></ul></ul><ul><ul><li>Effectiveness of advertising and promotions </li></ul></ul><ul><ul><li>Sales staff performance </li></ul></ul><ul><ul><li>Bad debt expense and credit policies </li></ul></ul>
  157. 157. REVENUE CYCLE INFORMATION NEEDS <ul><li>Both financial and non-financial information are needed to manage and evaluate revenue cycle activities. </li></ul><ul><li>Likewise, both external and internal information is needed. </li></ul>
  158. 158. REVENUE CYCLE INFORMATION NEEDS <ul><li>When the AIS integrates information from the various cycles, sources, and types, the reports that can be generated are unlimited. They include reports on: </li></ul><ul><ul><li>Sales order entry efficiency </li></ul></ul><ul><ul><li>Sales breakdowns by salesperson, region, product, etc. </li></ul></ul><ul><ul><li>Profitability by territory, customer, etc. </li></ul></ul><ul><ul><li>Frequency and size of backorders </li></ul></ul><ul><ul><li>Slow-moving products </li></ul></ul><ul><ul><li>Projected cash inflows and outflows (called a cash budget ) </li></ul></ul><ul><ul><li>Accounts receivable aging </li></ul></ul><ul><ul><li>Revenue margin (gross margin minus selling costs) </li></ul></ul>
  159. 159. REVENUE CYCLE INFORMATION NEEDS <ul><li>Accountants should continually refine and improve an organization’s performance reports. </li></ul>
  160. 160. SUMMARY <ul><li>You’ve learned about the basic business activities and data processing operations in the revenue cycle, including: </li></ul><ul><ul><li>Sales order entry </li></ul></ul><ul><ul><li>Shipping </li></ul></ul><ul><ul><li>Billing </li></ul></ul><ul><ul><li>Cash Collection </li></ul></ul><ul><li>You’ve learned how IT can improve the efficiency and effectiveness of those processes. </li></ul>
  161. 161. SUMMARY <ul><li>You’ve learned about decisions that need to be made in the revenue cycle and what information is required to make these decisions. </li></ul><ul><li>You’ve also learned about the major threats that present themselves in the revenue cycle and the controls that can be instigated to mitigate those threats. </li></ul>

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